Despite challenges, private equity funds are doing well. In recently released research, L.E.K. Consulting identifies six strategies used by winning PE firms that allow them to flourish in the current market conditions.
Private equity (PE) is flourishing. However, given current market conditions, this may come as a surprise, with fundamentals of sluggish global growth. In addition, PE firms are sitting on huge cash piles, increasing competition for targets; stock-markets are soaring, increasing and introducing high multiples; interest rates are at historic lows; and geopolitical uncertainty introduces downsides for buy-in activity.
Despite these various challenges, PE funds are doing well. So, what are the best PE funds doing to flourish in the current environment? To find out, consulting firm L.E.K. Consulting, for its ‘Executive Insight’ series, talked with 150 PE market leaders to discover where and how they were finding value in businesses that other PE funds might be overlooking. Consultancy.uk provides a brief summary:
Choosing a winning sector early in its development
Winning PE firms develop an investment proposal based on trends or impending regulatory shifts. After which they identify a strategic segment within the larger market that they expect will benefit disproportionately in the new environment.
Buying and building from a smaller platform
Another strategy is to look for a quality target that may be missing a key ingredient, such as a lack of overseas markets, but presents opportunities to grow, organically or by acquisition. That could be a company that is small but offers entry into a market that is ripe for consolidation.
Leveraging knowledge developed from owned and divested assets
Using ‘hard-won’ knowledge and experience gained from previous investments can be indispensable in unlocking value in future deals in the same industry.
Deploying superior management
According to the consulting firm, top quality management is a scarce and important resource. “In a competitive environment where so many other variables are subject to commoditisation, identifying, recruiting and retaining top managers are all critical. […] The best PE firms skilfully match specific management talent with the needs of specific assets.”
Targeting underperforming companies
Top performing PE firms look at companies that have operational or strategic issues but have the potential for value creation through improvements.
Performing equity carve-outs of orphan divisions of large corporations
A final strategy is to go for equity carve-outs of orphan divisions. L.E.K. Consulting points out that while the operation might be challenging and involved, the targeted division might be a legacy division or perfectly viable operation that “for one reason or another are no longer part of the parent company’s core business.”